MSME exports hit more by issues related to GST implementation than demonetisation? Check what report says

MSME exports were hit more by issues related to GST implementation than demonetisation, according to a report released today.

The report noted that the credit growth in the MSME sector had started decelerating even before demonetisation, and declined further during the demonetisation phase.

MSME exports were hit more by issues related to GST implementation than demonetisation, according to a report released today. Micro, Small and Medium Enterprises (MSMEs), considered a powerful engine of the country’s economic growth, are contributing around 40 per cent of the overall shipments from India. “…MSME exports were affected more adversely by issues relating to GST implementation than demonetisation due to delay in refund of upfront GST and input tax credit affecting cash-driven working capital requirements,” said Mint Street Memo published by the RBI.

The report noted that the credit growth in the MSME sector had started decelerating even before demonetisation, and declined further during the demonetisation phase. “In contrast, GST implementation does not seem to have had any significant impact on credit. Overall, MSME credit and especially micro credit to MSMEs, including loans by banks and NBFCs, shows a healthy rate of growth in recent quarters,” it said with the disclaimer that the views and opinions do not necessarily represent the views of the RBI.

During the quarter April-June 2018, bank credit to MSMEs increased on average by 8.5 per cent (y-o-y), mirroring the level of growth during April-June 2015, with credit to micro and small enterprises growing at an even healthier rate. The growth in credit to MSMEs has recovered since the lows of late 2017 to reach the mid-2015 level, it said.

The report said among various items of MSMEs exports, gems and jewellery, carpets, textile, leather, handlooms and handicrafts items are highly labour intensive and depend heavily on cash for working capital requirements and payment towards contractual labourers.

“MSME exports showed only mild weakness post October 2016 (demonetisation period) but decelerated sharply during April and August 2017 (GST implementation period) with only a temporary recovery during the post-GST implementation period,” it said. In contrast, non-oil non MSME exports growth showed healthy growth post demonetisation but also suffered a dip during April-July 2017, it said.

Given the difficulties faced by MSMEs in debt repayments after demonetisation, the Reserve Bank announced a series of measures to provide some relief, it said. “The prudential norms were relaxed (on November 21, 2016) by providing an additional 60 days for repayment of dues, beyond what is applicable for loans to be considered as sub-standard for running working capital account, for accounts with sanctioned limit of Rs 1 crore or less,” it said.

The relaxation was extended (on December 28, 2016) by providing additional 30 days for repayment of dues, it said. “On December 29, 2016, the RBI advised banks to use the facility of providing additional working capital limit to their MSME borrowers to overcome the cash flow mismatches. This was a one-time measure valid up to March 31, 2017,” it said.